Tax deductibility

1. General

Whether Kindergarten, or childminder or nanny in one’s own home– two-thirds of childcare may be deducted for the first time in 2006.

2. Tax exemption period and amount

Working single parents and couples where both parents work may deduct two-thirds of child care costs as professional or operating expenses. These costs may be deducted until the child’s 14th birthday, maximum EUR 4,000 per year and child. If the single parent or one of the parents is ill, disabled or in school and the other parent works or is also ill, disabled or in school, the same deductions may be taken under the category additional expenses. Single-earner couples may also deduct two-thirds of childcare costs for their three- to six-year old children, up to maximum EUR 4,000 per year and child, under the category additional expenses.

3. Proof of childcare expenses

Because the upper limit of EUR 4,000 is not a lump sum exemption, parents must provide detailed account of the individual expenses. Childcare expenses must be documented with invoices and in case of payment, with the bank statement indicating such payment to the individual providing the childcare. In some cases the invoices may be substituted with employment agreements or fee statements from publicly operated childcare facilities. Employment agreements are also considered to be invoices. For the time period up to 31 December 2006 the authorities have loosened their requirements of proof, because the tax rulings only took effect as of mid-2006. For this period, invoices and bank statements are not required—for instance, a childminder’s performance record is sufficient.

4. Unmarried parents

In such cases, the parent to whose household the child belongs and who bears the expense of raising the child is entitled to tax deductions. Unmarried parents may each deduct a maximum of EUR 2,000.

5. Categories of deductible childcare expenses

All expenses incurred for childcare are deductible. This includes expenses for kindergarten, babysitters, childminders and household help. Not deductible are expenses for recreational activities, such as sport club fees or music schools, nor are tutoring costs or food expenses. If an au-pair works in the household and the portion dedicated to childcare is not evident from any documentation of payment, a portion of 50% of au-pair costs may be deducted. Childcare expenses incurred are to be allocated to the income of the individual whose employment situation gave rise to the expenses. Otherwise a loss will be incurred and the trade earnings will be reduced.

6. Prerequisites

6.1 Eligible parents (pursuant to Sec. 9c of the German Income Tax Act (Einkommensteuergesetz: EStG)

Parents paying income tax have unrestricted eligibility if they incur expenses for childcare due to

► gainful occupation (Secs. 9c (1), 9 (5) EStG);

► schooling (Sec. 9c (2) sentence 1 EStG);

► physical or mental disability or mental illness (Sec.9c (2) sentence 1 EStG) or

► illness (Sec.9c (2) sentence 1 EStG).

If the parents live together, the prerequisites must be fulfilled by both parents. The marital status or tax status of the parents is immaterial.

6.2 Eligible children

Expenses must be related to childcare, such that:

■ the child benefits pursuant to Sec. 32 (1) EStG (Stepchildren and grandchildren do not qualify) or

■ the child is a part of the taxpayer’s household (of one or both of the parents)

AND

♦ the child is not yet 14 years old or, due to physical or mental disability or mental illness is not capable of supporting itself (Secs. 9c (1), 9 (5) EKST).

OR

♥ the child is between 3 and 6 years old (Sec. 9c (2) sentence 4 EStG)

7.  Definition of childcare expenses

These expenses include, inter alia,

۩ nurseries, kindergartens, daycare centers, childrens’ homes, childminders on a daily or weekly basis, and day nurses;

۩ employment of kindergarten assistants, kindergarten teachers or childrens’ nurses;

۩ employment of household help, insofar as it involves care of the child; and

۩ homework assistance.

8. Verification of expenses

Expenses must be documented with invoices and payment must be made to the account of the individual providing the services.

9. Deductible amount

Two-thirds of expenses may be deducted per child, up to a maximum of EUR 4,000 per child and calendar year or fiscal year. If the child lives outside of the country, the maximum amount will be reduced according to the country index.

10. Deductibility of childcare expenses related to employment pursuant to Secs. 9c (1), 9 (5) EStG

Deductions

Childcare expenses related to gainful occupation may be deducted as either professional or operating expenses.

Parents living together

If the parents live together, both must be gainfully employed.

Income from employment

Where the employee blanket deduction (Arbeitnehmerpauschbetrag) for income-related expenses is used in determining income, childcare expenses related to employment may be deducted separately, pursuant to Sec. 9a sentence 1 No. 1a EStG.

Multiple income sources

If multiple sources of income are declared on Exhibit N (Anlage N), childcare expenses are deducted from income sources in the following order:

♣  continuous income: gross wages, taxable wages without deduction, cross-frontier commuter wages, taxable portion of reimbursement of expenses

♣   income subject to the double-taxation treaty between Belgium and Germany

♣   compensation/ wages for the past several years

♣ wages exempted from tax by a double-taxation treaty, interstate treaty or  decree on employment abroad.

Allocation of childcare expenses to various sources of income

Where the income from the first source of income to be applied to deductions is lower than the applicable childcare costs, the income from this source is considered to be negative, and there is no further distribution of childcare expenses to other sources of income.

11. Deductibility of childcare expenses as tax reductions pursuant to Sec. 35a EStG

Non-eligibility for deduction pursuant to Sec. 35a EStG

If childcare expenses have already been deducted under Sec. 9 EStG (see above) they may not be deducted pursuant to Sec. 35a EStG.

Inclusion in the category household help

Where expenses for an au-pair have not been deducted pursuant to Sec. 9 EStG, 50% of these expenses may be deducted as household help pursuant to Sec.  35 EStG.

Application of Sec. 35a EStG

Tax reductions pursuant to Sec. 35 EStG are only permissible if there have not already been deductions taken for childcare expenses pursuant to Sec. 9 EStG. This applies in particular to single-income parents with children under 3 years old and between 6 and 14 years old. The childcare must take place in the parents’ household.

(Status 2009/2010, this information is supplied without liability.)